If you leave a company and you are vested in a qualified employer retirement plan, such as a 401(k) plan, you generally have several distribution options on how to take this money. Before you take a distribution, look at all your options and make an informed decision. You may have the following options available:
Leave the money in the former employer's qualified plan.
Directly roll over your qualified plan money into a new employer's qualified plan, assuming the new plan will allow you to do so right away.
Directly roll over your distribution into a conduit IRA until a new employer's plan will accept the money (necessary for certain plan participants to preserve capital gain and averaging treatment).
Directly roll over your distribution into a traditional IRA.
SUGGESTION: If you take your retirement money from your former employer's plan, and you do not have access to a qualified plan in your new job, it is a good idea to roll over your plan funds into a traditional IRA. This way you retain the deferral of taxes.
IMPORTANT NOTE: One disadvantage of rolling over qualified plan funds to a traditional IRA is that you lose the benefit of a special tax provision called "forward averaging." However, by rolling over the distribution to a conduit IRA in which qualified plan assets have been segregated, and then back into another qualified plan, you can preserve forward-averaging treatment. This special tax treatment is available to plan participants born before 1936.